Seizing the Moment: Nations Slash Energy Subsidies as Oil Prices Fall

Just as plummeting oil prices have caused state and federal political leaders to consider raising gas taxes, leaders in developing nations, both oil producers and consumers, are considering reductions in national energy subsidies.

"Across the Middle East and much of the developing world, government subsidies make energy cheap and encourage consumption," writes Clifford Krauss, energy correspondent for The New York Times. "But governments around the world are beginning to take advantage of plummeting oiland natural gas pricesby slashing the subsidies."

On Jan. 1, the Indonesian government abandoned a four-decade-old policy of subsidizing gasoline, permitting prices at the pump to rise and fall with global oil prices. As long as oil is cheap, Indonesians will not see much of a difference.

Subsidy reductions and tax increases have also been reported in Malaysia, India, and Egypt.

Among producers, the incentive to reduce subsidies comes from greatly reduced oil export revenue. “Many of the big producers have no choice but to raise domestic energy prices,” said Jim Krane, a Middle East energy expert at Rice University. Subsidies have been reduced by Ghana and Angola. "Nigeria is expected to follow suit after its national elections in February," adds Krauss. "Iran cut gasoline subsidies early last year."

However, "Saudi Arabia, Russia and Venezuela — three of the most heavily subsidized countries — have done little or nothing to reform," writes Krauss.

A reason for the subsidies is "to buy political support and [provide a] safety net to the poor, energy experts say," writes Krauss. "But they are also a drag on economic development and cause environmental damage by encouraging the burning of fossil fuels and discouraging efficiency, the experts say."

“We know from studies in Mexico, Africa and Asia that these subsidies do not end up in the hands of the poorest people,” said Amy Myers Jaffe, an energy expert at the University of California, Davis. “They put a strain on federal budgets that are needed to help the poor, and they end up helping the wealthiest and middle class in these societies more.”

For years, the International Monetary Fund and the World Bank have been urging Middle East producers and developing countries alike to cut subsidies. In a report in October [PDF], the I.M.F. reported that subsidies distort prices and foster overconsumption.

While the United States does not directly subsidize gas prices, though environmentalists are quick to point to note "that oil companies receive tax breaks for exploration," one of the two recommendations from Maria van der Hoeven, executive director of the Paris-based International Energy Agency (IEA) directed to Mideast producers at an energy conference in Abu Dhabi in December, could be applied to the U.S. as well.

“There is no time for action like the present," she said. "It’s an opportunity to put a price on carbon and slash fossil fuel subsidies.”

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